Labour’s interest deductibility decision: a welcome step towards better housing policy
 | Author: Kieran Trass Head of Research, Staircase. Property cycle analyst and author of five books on the New Zealand market. |
One of the tax uncertainties facing residential property investors has become smaller.
Labour has confirmed that, if elected in November, it will retain the current interest deductibility rules for residential landlords. It is still pursuing a capital gains tax, but will not combine that with another removal of interest deductions.
At Staircase, we welcome that decision.
Not because it settles every disagreement about housing taxation. It does not. But it recognises something our Housing Compass research has been arguing: you cannot judge a housing policy properly without examining what it does alongside the other policies already in place.
A connection we raised months ago
Four months ago, we submitted the Housing Compass papers to all major political parties. The purpose was to contribute research that looked beyond individual policy announcements and examined their combined consequences for housing.
The rental market paper addressed capital gains tax, interest deductibility and the treatment of rental losses together. Its recommendation was clear: maintain full interest deductibility and protect investment that adds new homes.
We are not claiming credit for Labour’s decision. We would like to think the papers may have contributed, indirectly, to the wider policy discussion.
What we can say is that the decision is consistent with a recommendation we had already put forward.
Chris Hipkins’ explanation is particularly relevant. In confirming Labour’s position, he said:
“So there is an interrelationship between those two policies, which was the thing that we said we were going to work through. We’ve now worked through that, and we’re not going to make further changes.”
(Source: Stuff)
That is the connection our research examined.
A tax on gains is different from denying an expense
Interest deductibility can sound technical. The principle is straightforward.
When money is borrowed to provide a rental property, the interest is a real cost. Subject to the normal tax rules, that cost can be deducted when calculating taxable rental income.
Full deductibility has been restored since 1 April 2025, so Labour’s announcement preserves the current position rather than introducing a new tax reduction.
A capital gains tax works differently. It taxes a qualifying gain when the property is sold.
Our research explained why the distinction is essential. Denying interest deductions changes the cost of keeping a rental property from year to year.
A CGT changes the after-tax outcome when it is sold, and can influence whether and when an owner sells. Put the two together and the investor faces a different calculation from either policy on its own.
A rental property does not experience government policy one announcement at a time. It carries the combined cost.
That was the concern behind our recommendation, not that property investment should be exempt from scrutiny, but that tax decisions should be tested against their wider housing consequences.
Remember the households on the other side
The Housing Compass asks policymakers to look beyond the immediate taxpayer.
A change affecting rental investment can also affect tenants, first home buyers, developers and the demand for public housing support.
Paper 6 of the Housing Compass therefore proposed a Rental Supply Impact Test: examine existing rental stock, likely rental stock additions over one, three and five years, and whether the proposed settings still support investment in rental housing.
This does not mean every investor sale is a housing loss. A home sold to an owner occupier remains a home. Where a tenant becomes an owner, rental demand may fall too. The assessment needs to distinguish changes in ownership from changes in the number of homes being built and consider households that still need to rent. Our earlier briefing explicitly distinguished a smaller private rental pool from a reduction in total rental dwellings.
The aim should be better outcomes across the housing system, not simply a favourable result on one measure.
There is still more to examine
Retaining interest deductibility does not settle the CGT debate.
Our research recognised that a broad capital gains tax can have legitimate revenue and tax fairness objectives. It also warned against presenting CGT as a housing affordability solution on its own. Its design and its interaction with the rest of the housing system still require examination.
The treatment of rental losses is another separate question.
Under the current ringfencing rules, excess residential rental deductions generally cannot be used against salary or wages. They are carried forward for use against qualifying residential property income. Preserving interest deductibility does not remove that restriction.
The Housing Compass recommended allowing losses from qualifying new rental builds to be offset against other taxable income for the first five income years. The purpose was to support investment that adds homes, rather than treating it identically to the purchase of existing stock. That remains a distinct proposal, not something delivered by Labour’s interest deductibility announcement.
A welcome decision, not the end of the discussion
Housing policy needs room for parties to reconsider their positions without every change being treated only as a political defeat.
We should welcome a decision that is consistent with sound analysis, regardless of which party makes it. We should also keep testing the parts of the policy package that remain unresolved.
For Staircase, the Housing Compass is about contributing to that discussion before decisions are locked in, not simply commenting after the consequences arrive.
The goal is not to win credit for a policy change. It is to help produce housing policy that works for the people who need homes.
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